Flexible health spending accounts, an employee staple for reducing medical bills, are poised to become less flexible.
Under the new health care reform law, obtaining reimbursement for over-the-counter medications will become more difficult. The primary change: A doctor’s prescription will be required beginning January 1. And beginning in 2013, the total amount that an employee can set aside through their paycheck, with pretax dollars, will be capped at $2,500 annually.
The new provisions, as they are implemented, shouldn’t create significant headaches for the bulk of people, many of whom shelter less than $2,500 in their FSAs, benefits experts say. The money accumulated in the voluntary accounts must be used within a specified time or the balance will be forfeited.
But the changes do require some education on the employer’s part and may frustrate employees with tight budgets and chronic medical conditions. (FSAs can save employees an average of 30 percent, according to benefits administrator Ceridian.) Plus, the new hurdles add more layers of complexity to an already misunderstood tax-sheltering strategy.
“There is a certain portion of the U.S. workforce that even today—and we see this at benefits fairs—don’t know what a health FSA is and they still confuse it with a health plan,” says Chris Ryan, chief strategy and marketing officer at SHPS, a Louisville, Kentucky-based benefits administrator.
The new over-the-counter medication rules also are “likely to raise costs,” says Dr. Jay Bhattacharya, a health economist and associate professor of medicine at Stanford University. Some employees will have to schedule a doctor’s visit specifically for the prescriptions, he says.
The potential impact
Health FSAs are commonly offered by large employers, but the uptake remains relatively low. In 2009, 85 percent of companies with 500 or more employees provided the account option, according to Mercer’s annual survey of employer-sponsored health plans. Just 22 percent of eligible employees opted to participate.
On average, they contributed slightly more than $1,500 annually, with little money forfeited. At large companies, just 4 percent of dollars was left unspent, according to the Mercer data. Still, the use-it-or-lose-it provision can be an enrollment deterrent, since some medical costs are difficult to predict, says Jennifer Calhoun, a principal in Mercer’s health and benefits business.
Based on SHPS’ client data, the average FSA user is 43 years old. Two-thirds of users are married and nearly that many have children, Ryan says. The median income ranges from $50,000 to $70,000 depending upon the size of the company and the industry involved. In short, Ryan says, the FSA is an important “tool that helps middle-class families make ends meet.”
Since 2003, following an IRS ruling, employees also have been allowed to use FSA dollars on over-the-counter medications, such as aspirin or allergy products. The new prescription requirements will “probably cause some confusion at first,” says Paul Fronstin, a senior research associate at the Employee Benefit Research Institute. “There will be some people who will submit claims and those claims will be denied.”
According to SHPS data, 26 percent of FSA dollars are spent on prescription and over-the-counter medications. Just 1.5 percent of those total dollars purchase over-the-counter medications, Ryan says. The three most common categories are pain relievers and allergy and stomach-related medications.
Despite the low dollar value, the volume of those purchases—and thus the related frustration factor—can be significant, Ryan says. “I think the real downside is that certain people with certain chronic conditions may revert to prescription,” he says. “Or they will have to get a doctor’s visit, which could unnecessarily increase the number of doctor visits.”
David Wirta, senior vice president of sales and marketing at Ceridian, is less convinced, given the limited non-prescription spending involved. “I don’t know if it will have the potential to have an adverse impact on people’s purchasing habits or the viability or attractiveness of FSA plans,” he says.
The fine print
Until the regulations are issued, corporate leaders should err on the conservative side when interpreting new FSA provisions, says Kelly Traw, a lawyer and principal in Mercer’s Washington Resource Group.
For example, some companies may provide a grace period of up to 2½ months into the following year to use up any remaining account funds. But it would be safer in 2010 to remind employees to wrap up any over-the-counter medication purchases, as well as submit claims for reimbursement, before year’s end, she says.
Employers also should keep in mind that the medication change is effective January 1, even for companies whose health plans don’t run on a calendar-year cycle, Wirta adds.
Moving forward, employers should keep an eye on prescription drug costs in categories with nonprescription options to see if there has been any notable bump up in usage, says Ryan of SHPS. Meanwhile, start educating employees about the $2,500 cap that starts in 2013, so they can plan accordingly, he says.
Based on an analysis of SHPS data, only 20 percent of FSA users might be affected by that $2,500 cutoff, Ryan says. Unfortunately, they are more likely to be facing significant health issues, he says. “Some of those users have a very strong reason for putting $5,000 or more into an FSA.”
Before the passage of the health reform law in March, the nonprofit Center on Budget and Policy Priorities advocated curbing or eliminating the accounts, saying they fostered overconsumption of health care. Stanford’s Bhattacharya makes a similar point. “The FSA, by not allowing a rollover, creates these sorts of strange incentives to spend down at the end of the year on things that might not be particularly useful,” he says.
In one sense, a lower annual cap will limit that tendency, he says. But the hurdles involved in getting nonprescription medications reimbursed may create a new set of issues, he says.
Take a runner, who may have previously stocked up on ibuprofen at year’s end for a nagging knee. They may punt on that idea if a doctor’s visit is needed, Bhattacharya says.
They’ll either forfeit the remaining funds, he says, “or, they’ll spend it on even less valuable things—like a third pair of sunglasses.”
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